A debt crisis is looming in the Global South, compounded by the threat of climate change.
World leaders such as Kristalina Georgieva, David Malpass, the Biden administration and 23 former Finance Ministers and Central Bank Governors have added their voices to a growing chorus calling for comprehensive debt relief linked to a green and inclusive recovery that involves private sector participation and middle-income countries.
A new report from the Boston University Global Development Policy Center, the Heinrich Böll Foundation and the Centre for Sustainable Finance at SOAS, University of London lays out an ambitious proposal for concerted and comprehensive debt relief on a global scale to free up resources in heavily indebted developing countries to support sustainable recoveries, boost economic resilience and foster a just transition to a low-carbon economy.
Background:
- High levels of debt service are impeding crisis responses and contributing to a worsening development prospects in many low- and middle-income countries. It also threatens the ability of countries to adapt to the impending climate crisis and to achieve the 2030 Sustainable Development Goals.
- 23 of the 72 countries identified by the United Nations Development Program as being at high risk of external debt distress are not covered by the G20 Common Framework for Debt Treatments, many of which are middle-income countries with large populations.
- Both the International Monetary Fund (IMF) Managing Director Kristalina Georgieva and World Bank President David Malpass have announced plans for their respective institutions to develop schemes for linking debt relief with green, resilient and inclusive development.
- The G20 Finance Ministers and Central Bank Governors (FMCBG) will gather virtually, from July 9-10, 2021 for the third G20 Finance Track Ministerial meeting under the Italian G20 Presidency to address global economic, fiscal and monetary issues.
The Proposal:
- The IMF and the World Bank perform an enhanced Debt Sustainability Analysis that accounts for climate risks and spending needs to scale-up investment in climate resilience and the 2030 Agenda for Sustainable Development to determine if a country needs restructuring and the level of debt relief.
- Create a Guarantee Facility for Green and Inclusive Recovery managed by the World Bank in close cooperation with regional development banks that would provide credit enhancements for new bonds that could be swapped by private creditors for old debt with a significant haircut.
- If debt servicing on the new bonds are missed, the collateral would be released to the benefit of private creditors, and the missed payment would have to be repaid by the sovereign to the guarantee facility.
- Governments receiving debt relief would commit to reforms that align their policies and budgets with the 2030 Sustainable Development Agenda and the Paris Agreement, and would develop their own Green and Inclusive Recovery Strategy, in which they map out a set of actions to advance their development and climate goals, with clear targets and performance metrics.
- Governments would also commit to enhancing debt transparency, adopting sustainable borrowing practices and to strengthening public debt management capacity and domestic resource mobilization.
- Some portion of the restructured repayments would be channeled into a Fund for Green and Inclusive Recovery (or an already existing national fund that could be used for this purpose) that would be used by the government for investment in SDG-aligned spending of its choice.
- The IMF, along with the financial authorities of major advanced economies and China, would play a key role in further incentivizing private sector participation in restructurings by using moral suasion and regulatory tools.
According to the authors, “Neither low- nor middle-income countries can afford a debt overhang during the most daunting crisis of generations. They should also not be hamstrung in responding to the unfolding climate crisis during the most important decade for resource mobilization… The world cannot afford to do too little too late while facing a planetary emergency.”
This report was originally shared by the BU Global Development Policy Center.
